Competitive bidding of coal blocks Jul 2012 .

Competitive bidding of coal blocks

Jul 2012

www.pwc.com

Competitive Bidding of coal blocksPwC 2

Agenda

• The local and global context

• The auction opportunity

• Strategies for competitive bidding

Jul 2012


The local context

• The challenges of strong demand growth and it’s features;

• Coal dominates current and incremental energy use;

• Supply diversity is limited, and resource nationalism is rising;e.g., super profit tax, carbon levy, DMO, transfer pricing, equity/profit share, shorter tenor of supply contracts

Source: CEA 2010

CountryCommercial fuel access

Population without electricity

Commercial fuel subsidy (% of total)

South Africa

83% 12 m 16%

China 42% 8 m 38%

Vietnam 34% 9 m 39%

Pakistan 32% 70 m 18%

India 29% 405 m 50%

Source: G-20 Joint Subsidy Report June 2010

Commercial fuels in above table: Power, LPG, Kerosene

Thermal- 106

Hydro- 37

Nu-clear 4.6

Re-newable 17

Generation Capacity (GW)

Jul 2012


The global context

The growing disconnect

• 2011: a year of a great contrast – record profits for the Top 40 of $133 billion (up 26%) but market cap. fell by 25%

• Top 40 invested $98 billion in capital projects in 2011. Plan for a further $140 billion in 2012

• Continue to see high commodity prices, underwritten by higher production costs, lower grades.

• The key is the ability to bring on supply through the right projects.

Jul 2012


Capital expenditure up to $98 billion

-

5

10

15

20

25

Capital expenditures by commodity ($ billion)

2011 2010

Column Regular

be8ab0588c3e42dfa2290fbbb57a76af

-

5

10

15

20

25

30

35

Capital expenditures by location($ billion)

2011 2010

Column Regular

be8ab0588c3e42dfa2290fbbb57a76af

Source: PwC Analysis Source: PwC Analysis

Jul 2012


Key provisions of auction rules

• Earmarking of coal blocks:

- For Government cos. in steel or power (16; 7.27 BT) at Reserve Price.

- For power, through tariff based competitive bidding (16; 8.16 BT).

• Auctioning of coal blocks:

- Bidders to submit Technical and Commercial offers

- (22, 2.79 BT)

- Floor / Reserve Price: to be notified for each area.

Auction by Competitive Bidding of Coal Mines Rules, 2012

• Rules issued (Feb 2012) for auction of coal blocks

• End-use and mode specified for identified coal blocks (54; 18 BT)

Jul 2012


Coal blocks identified for allocation

End useNo. of blocks

Resources (MT)

Earmarked for Govt.

companies

Allocation route

Integrated Steel

12 4415 4

1. Reserve Price for blocks earmarked for Govt. Cos.

2. Highest bid price for others

Cement 7 637 0Highest bid price (>Floor price)

Sponge Iron

5 381 0Highest bid price (>Floor price)

Surface Gasification

2 136 0Highest bid price (>Floor price)

Power 16 8165Not yet finalised

Blocks earmarked for both1. Tariff based bidding and2. Central Government Cos.,

for allocation at Reserve Price

Commercial mining

12 4453 12 Reserve Price

Source: MoC notice “Identification of coal blocks for allocation and earmarking for various sectors” dated 30 May 2012

Jul 2012


Key issues

• Areas not identified yet for allocation

- allocation or pending exploration

• How is technical criteria determined?

- sub-rules, standard bidding documents

• Balancing growth imperative with industry structure

- delivering capacity vs. competition

• How will bidders respond?

Jul 2012


Strategies for competitive bidding

Cost-side

• JV with mining majors

• Equipment sizing

• Transportation options

• Diversify risk into MDO contract

• Financing strategy

Revenue-side

• Inter-se terms with the end-use plant (more, if surplus or group sale is permitted)

• Design of end-use plant

• Assured fuel availability

• Quality and grade control

• Early preparation and a clear strategy

• Key decisions (asset, end-use, design, technology, partner)

Jul 2012


Setting the objectives

Be competitive to secure PPAs in tariff based bidding close to regulated rates (reasonable returns in steel and cement)•market share•productivity gains and

financing

Mine planning, capital expenditure, and good operating practices to keep costs low/optimal.•activities•equipment•availability•contracts

Managing one’s participation in bid process•modelling•risk mitigation•procurement•technical scores

Jul 2012

Objectives for the overall bid

Objectives for the mining activity

Objectives for the auction process


Assessing the components

•Land required can be optimized in mining plan by simultaneous back filling of mined area or in-pit dumping of OB. Can save land cost by 10% depending on site condition and mine size.

Land

•Impact assess, training and deployment,

R&R

•Effluent treatment for re-use and minimizing loss of water in mining process over mine life.

Water supply

•Location, capacity, terrain, layout for material movement (rail, road, slurry, conveyer, etc)

Logistics

Jul 2012



•Based on the mine plan, method of mining, production plan etc. Broadly, higher equipment size is seen to reduce costs by about 20-30%.

•Strategic sourcing and supplier performance.

HEMM

•Equipment scheduling, Placement (e.g., location diesel sump) , Operating protocols etc., optimize cycle time, reducing operational costs (0.5 min less cycle time equates to 1.75 haul trucks in the fleet, thus saving capex and operating cost).

Operational costs

•Maintenance planning & scheduling: proper planned maintenance reduces cost by 10-15%.

•Operator training; early problem identification.

Maintenance costs

Jul 2012


Maintenance management

Jul 2012

Activity Company % Multiplier UnitsCosts total for

150 unitsPlanned / Productive Maintenance

60% 1 60 $40 million

Unplanned Corrective

20% 1.5 30 $20 million

Breakdown 20% 3 60 $40 million

Total 100% - 150 $100 million

Total (100%)

Planned (60%)

PM (30%)

Corrective (30%)

Unplanned (40%)

Breakdown (20%)

Emergency (10%)

Urgent (10%)

Corrective (20%)

Activity Company % Multiplier UnitsCosts total for

118 units

Planned / Productive Maintenance

80% 1 80 $53 million

Unplanned Corrective

15% 1.5 22.5 $15 million

Breakdown 5% 3 15 $10 million

Total 100% - 117.5 $78 million

Total (100%)

Planned (80%)

PM (45%)

Corrective (35%)

Unplanned (20%)

Breakdown (5%)

Emergency (1%)

Urgent (4%)

Corrective (15%)

Fleet reduction



•Optimum rate of advance, size of fragmentation can be achieved by selecting right explosives (blasting has 3:1 cost advantage over crushing / grinding; proper technique reduces sizing cost)

Explosives

•Procurement strategy for POL can help reduce its cost over mine life.

•Mobile / in-pit refilling practices help enhance utilization time.

POL costs

•Ancillary plant designed for optimize use.

•Beneficiation plant design capability.

Balancing plant

Jul 2012



•Match ROM coal sizing to end use requirement: production cost varies by the size of coal needed (current pricing suggests 50% reduction in size increases unit cost by 25-60%. Impacts boiler performance; penalty high at 30-50% of price).

Grade control and

mill feed variability

•Metallurgical and geological interpretation.

•Safety and statutory requirements.

•Shared facilities and resources.

•Historical experience, site specific constraints.

Others

Jul 2012


In conclusion

• For the Governments

- deliverability of projects

- transparency, public interest, and equity

• For the consumers

- improved supply and standards

• For the bidders / investors

- security of supply

- bid strategy

Jul 2012

Thank you

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2010 PricewaterhouseCoopers India Ltd. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers India Ltd which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Competitive bidding of coal blocks Jul 2012 .

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